Stopping cash injection entails rating downgrade risk: SBP governor

State Bank of Pakistan (SBP) Governor Yaseen Anwar on Monday said that liquidity injection into commercial banks could be stopped, but it would have downside risks, including a country''s credit rating downgrade. Speaking here during the meeting of Senate Standing Committee on Finance, Yaseen Anwar said there are serious downside risks of restricting commercial banks to purchase government papers.

He said this would send a negative signal to rating agencies. He said restricting the commercial banks from purchasing government papers would have a negative impact. It is the objective of the central bank to ensure monetary and financial stability. The liquidity injection could be stopped tomorrow but it could affect country''s ratings. There is a need to develop a long-term vision in areas of agriculture, SMEs and housing sectors, he maintained.

Yaseen said that banks are investing about 65 percent in government papers but now the SBP has been stating that the banks have to shift to a long-term view. There is a need to focus on long-term investment in agriculture, SMEs and housing finance. In developed countries, housing financing is in the range of 70 to 100 percent but in Pakistan it is 1 percent of GDP.

He further said that debt market is being established to cater to the financial requirements of the private sector. The SBP and Securities Exchange Commission of Pakistan (SECP) are on the same page on the issue. The SBP and SECP are engaged in development of debt market in Pakistan as well as long-term financing arrangement. About International Monetary Fund (IMF) concern about monetary management, Yaseen said that 2 percent discount in interest rate was in fact based on a decline in inflation and the government also wanted to encourage private sector investment. He said investment of the private sector increased involving capital. About liquidity injection, he said that liquidity by the SBP was being injected to maintain stability in overnight cost of borrowing and ensure that those who are unable to go to interbank market their business are not collapsed.

He said the regulator is taking measures to discourage banks'' tendency of investing in the government papers by creating a proper debt market and SBP is working on it. The creation of proper debt market would be an investment vehicle to cater to the needs of the private sector. About anti-money laundering, he said Pakistan is in the list of five countries not because of financial services but because of problems in terms of legislative actions about enforcement and conviction. On a question about appointment of deputy government, he said that according to rules of business, the Prime Minister is the competent authority for the approval of deputy governor.

He said Pakistan will amend Anti-Terrorism Act and is working on a draft legislation to ensure enforcement of Anti-Terrorism Act provisions in financial services sector for conviction of persons found involved in money-laundering. Financial Action Task Force (FATF), an international body on anti-money laundering has placed Pakistan among countries whose status has been determined in a public statement. In order to prepare a new legislation for making amendment to Anti-Terrorism Act, Ministry of Finance, Ministry of Interior, Securities and Exchange Commission of Pakistan, State Bank of Pakistan along with other stakeholders are working on a new legislation to put Pakistan back on Anti-Money Laundering-compliant countries'' list.

Secretary Finance Wajid Rana said the issue of appointment of deputy governor SBP is in the process and there is no problem in it. Chairman of the Committee Ahmed Ali said the office of the deputy governor SBP has been uncoupled for the last four months, which is causing enormous burden on the governor.